• The combined deficit of UK pension schemes increased by almost £26 billion last month, from £140.5 billion at the end of August to £166.1 billion at the end of September (https://www.ppf.co.uk/sites/default/files/2020-10/PPF%207800%20at%2030%20September%202020%20for%20October%20update.pdf)
• Over the past 12 months aggregate deficits have risen by almost £50 billion, with plummeting gilt yields among the primary causes
• Deficits could worsen further if the Bank of England is forced to cut interest rates from the current level of 0.1%
• Pension Protection Fund warns it will likely need to take on more DB schemes from failed companies due to COVID-19
Tom Selby, senior analyst at AJ Bell, comments:
“The aggregate deficit of UK defined benefit schemes remains eye-wateringly high at £166 billion, driven in large part by the Bank of England’s interest rate policy in response to COVID-19.
“Low central bank interest rates place downward pressure on Government gilt yields, which is bad news for DB pension schemes as this pushes up the value of liabilities.
“While the value of investments held on behalf of DB members has recovered since the market lows of March and April, persistently low gilt yields are working in the opposite direction.
“And with tougher lockdown measures coming into force this week and the Bank of England warning negative interest rates may be needed to keep the economy afloat, it is possible DB deficits will rise still further as the UK claws its way through the remainder of 2020.”
PPF faces further strain
“With the Government reducing the amount of financial support available to businesses, it is inevitable some will go bust. This will present a challenge for the PPF, which is responsible for paying a portion of the pensions owed to members of failed companies.
“Individuals in DB schemes worried about the future should take some comfort from the existence of the PPF, which provides a valuable lifeboat guarantee meaning you should get at least 90% of the value of your pension.
“Furthermore, a deficit is just a measure of the funding position of a DB scheme at a point in time. Arguably the most important thing is the health of the company ultimately responsible for paying your pensions.
“For firms already facing severe challenges in the face of COVID-19, having to deal with a rising DB deficit is clearly far from ideal. Many businesses will likely face a difficult balancing act in plugging these deficits while also investing the necessary cash today to ride out the current crisis.”
Source: Pension Protection Fund
Source: Pension Protection Fund
